- THE MAGAZINE
Partially offsetting these higher costs were increased gross profit and lower interest expense. Income from continuing operations for the third quarter of 2008 included net pre-tax expenses of $17.9 million, primarily related to restructuring charges, the loss on extinguishment of debt, and corporate development activities. In the third quarter of 2007, income from continuing operations included net pre-tax expenses of $6.5 million, primarily related to restructuring charges.
“Our third quarter results continued the momentum built throughout 2008, with growth in net sales and segment income,” said Chairman, President and Chief Executive Officer James F. Kirsch. “Despite a deteriorating economic environment, the initiatives that we began in 2006 to rationalize our manufacturing assets and improve our business processes continue to generate positive results. We were successful in our sale of the Fine Chemicals business, and we are investing in our growth businesses, as evidenced by the construction of our latest solar pasting facility in Suzhou, China. We remain committed to our long-term goals, including completing our manufacturing restructuring and improving profitability, even as we focus our near-term efforts on controlling costs and discretionary spending.”
Price increases and changes in foreign exchange were the most significant drivers of sales growth during the quarter. Price increases during the quarter included higher precious metal costs, which are passed through to customers as higher product prices. Changes in foreign currency exchange rates accounted for approximately one-third of the sales increase. Volume was a negative contributor to sales in the quarter, as increased sales volume of electronic materials and tile coating products was more than offset by volume declines in other product lines.
In the 2008 third quarter, sales growth was strongest in the Electronic Materials segment, driven by conductive pastes used by solar cell manufacturers. Increased precious metal costs contributed to the sales increase. Sales also increased in Performance Coatings, Polymer Additives and Other Businesses, primarily as a result of a combination of increased prices and foreign currency exchange rates, partially offset by lower sales volume. Sales in Color and Glass Performance Materials increased slightly as favorable changes in foreign currency exchange rates were largely offset by lower sales volume. Sales in Specialty Plastics declined as a result of lower demand from customers in the automotive, appliance and housing markets.
Gross profit percentage was 18.7% of sales for the third quarter of 2008, compared with 18.2% of sales in the third quarter of 2007. Gross profit for the 2008 third quarter was reduced by $1.5 million, primarily as a result of asset write-offs and manufacturing rationalization activities. During the third quarter of 2007, gross profit was negatively impacted by charges of $0.5 million, primarily related to manufacturing rationalization.
Selling, general and administrative (SG&A) expense was $78.3 million in the third quarter of 2008, or 12.9% of sales. Included in the 2008 third quarter SG&A expense were charges totaling $1.9 million, primarily related to corporate development activities, partially offset by an insurance settlement. SG&A expense in the third quarter of 2007 was $71.1 million, or 12.9% of sales. There were no significant special charges included in the 2007 third quarter SG&A expense.
Total segment income for the 2008 third quarter was $48.8 million, compared with $36.3 million in the third quarter of 2007. The increase in total segment income reflected improved performance across a number of segments. Segment income increased in Electronic Materials as a result of higher sales volume, improved product mix, and benefits from prior-period restructuring and other manufacturing cost improvements. Income increased in Performance Coatings largely as a result of lower manufacturing costs, successful value pricing and reduced SG&A expense, partially offset by higher raw material costs.
Increased income in the Polymer Additives segment was driven by product price improvements and lower manufacturing costs that offset raw material cost increases. Segment income declined in Color and Glass Performance Materials, primarily as a result of higher manufacturing costs, lower sales volume and an increased bad debt allowance, partially offset by lower SG&A expense. Specialty Plastics income declined as a result of lower manufacturing volume and higher raw material costs that were not fully offset by value pricing initiatives and cost control actions. Segment income increased in Other Businesses as a result of increased sales volume of pharmaceutical products and lower SG&A expense.
Restructuring charges were $9.0 million for the 2008 third quarter, an increase from $5.8 million in the prior-year period. The increased charges were primarily the result of restructuring initiatives in Europe in the Performance Coatings and Color and Glass Performance Materials segments.
Ferro recently announced that the U.S. portion of the sale of its Fine Chemicals business to Novolyte Technologies LP, an affiliate of Arsenal Capital Management LP, has closed. The Fine Chemicals business was sold for $60 million in cash. A portion of the proceeds will be held in escrow until the completion of an equity transfer related to the business’ manufacturing facilities in Suzhou, China. The equity transfer of Ferro Suzhou is subject to certain conditions, including government approval of the equity transfer in China and the receipt of certain permits or licenses. The equity transfer is expected to be completed by the end of 2008.
The company expects 2008 fourth quarter net sales to be between $500 million and $550 million, compared with net sales of $571 million recorded in the fourth quarter of 2007. The sales estimate incorporates the sale of Ferro’s Fine Chemicals business during the quarter. The sales estimate for the fourth quarter is consistent with current foreign exchange rates, the company’s cautious outlook for worldwide economic activity, and an estimate of the impact of recent credit market tightening on overall consumer and industrial demand. The sales decline also is the result of expected weaker customer demand, principally in the U.S. and Western Europe.
Net income per share in the 2008 fourth quarter is expected to be in the range of $.33 to $.38 per share, including an estimated gain of $.31 per share from the sale of the Fine Chemicals business. Also included in the fourth quarter earnings estimate are charges of approximately $.13 cents per share, primarily related to the company’s ongoing manufacturing rationalization activities. Net loss per share in the fourth quarter of 2007 was $2.59 per share, including charges of approximately $2.71 per share, primarily related to an impairment of goodwill recorded during the quarter.
For additional details, including an archive of a recent conference call discussing these results, visit www.ferro.com.